ISO 20022: If Itís Not Broke, Fix It?

How the new ISO 20022 will change the business-to-business payments landscape.

The brave new world of electronic B2B payments is not shaping up to be a utopia. Just because check payments are slowly going away, does not mean the same applies to payments issues. In fact, the rise and mass adoption of electronic payments creates new problems for businesses.

Typically, businesses receive electronic payments through one channel, but all the corresponding invoice or payment information through another, such as a fax, an e-mail, or even snail mail. Matching those disparate details and reconciling the information to post cash can create headaches and slow down cash flow. Recognizing the pending challenges, the Federal Reserve is acting as a catalyst for the new standard for making money flow faster.

At the recent NACHA 2014 Payments Conference, the Remittance Coalition, a cross-industry group comprised of banks, corporations, and the Federal Reserve Bank of Minneapolis, announced its formal approval of the new ISO 20022 Standalone Remittance Message standard. The new standard “improves upon the original ISO 20022 standards by allowing the addition of detailed remittance data. Essentially, it supports all the content that is supported by STP 820. Thus, any user of STP 820 should be able to use the ISO 20022 Standalone Remittance Message format.”

The new format promises to be an advancement as trading partners try to improve payment-to-posting of transactions. As is the case with any new standard, adoption is a major concern.

Given the relative similarity to the current widely used STP 820, many trading partners may not make the effort to deploy the new standard. Why? For starters, the scarcity of technical resources within organizations -- a widespread occurrence -- stands in the way of adoption.

It boils down to this: ISO 20022, despite its good intentions and the clarity it will provide to major software product vendors such as SAP and Oracle, is best suited for new trading partner relationships rather than the hundreds of thousands of relationships already in place.

Then why all of the effort and the fuss?In the long run, this new standard will serve a defining role in solving for the growing pains experienced by trading partners as trade payments move from paper to electronic alternatives, including ACH.

Highlights from the Association for Financial Professionals 2013 Payments Survey provide some context. According to the survey, the majority of B2B payments in 2014 will be made via ACH and not check. Almost 50% of corporate respondents indicated they will move their major trading partners to ACH within the next three years. While the digitizing of payments will help improve cash flow, problems will persist, as 74% of the ACH payments made will not include the invoice details associated with the payment. (This dirty little fact is the true target the Remittance Coalition is intending to address.)

Unlike the European Union SEPA initiative, which strictly requires payment standards, the US payments process lacks the discipline to ensure there is a requirement to use formal standards for invoice details. In addition, many banks are historically, significantly lagging in their ability to provide the invoice details if they accompanied the payment in a format easily used by their customers.

Will history repeat itself?Just as lockboxes were invented to accelerate the clearing of checks and to use the scale of a bank’s automation to remove the burden from corporate back offices, a new wave of bank products is entering the market to address these operational pains for corporate customers. Under the umbrella term “integrated receivables,” this new set of products will address the re-association of payments and invoice details, correction of exceptions, and matching of invoices to ERP data. As the new ISO 20022 standard is more widely used, it will improve the effectiveness of these solutions.

The Remittance Coalition and AFP survey results are eye-opening to many banks that have not been attuned to the shifting payments landscape and the needs of their corporate customers. At our recent annual customer conference, my company, WAUSAU Financial Systems, projected lockbox volumes will decrease by 9% to 10% per annum when the shift to electronics gets fully underway.

If the projected decline in paper B2B payments is similar to the decline experienced in consumer payments over the last decade, the degree of difficulty experienced by companies in posting trade transactions could become very problematic. The forward thinking of the Remittance Coalition to address the need for usable standards upfront will help in lessening the transition pain from paper to electronic payments.

Lawrence F. Buettner is a senior vice president at Wausau Financial Systems, which provides receivables technology for financial institutions. He has 30 years of experience in financial treasury management and was a senior vice president at First Chicago. View Full Bio

The migration to any new standard takes time. The EU migration under the SEPA initiative is one example. It has been almost ten years since the original mandates were published and full compliance was only recently achieved. In the U.S., SEPA will begin to have a direct impact on the adoption of the new ISO remittance standard. Non-European countries will need to comply with the SEPA standards by October 2016. This means U.S. banks and companies will need to send their payments in the new standard by that time. Given the nature of global trade, this will provide impetus for adoption of the standard for both international payments and domestic payments, as well. Companies will not want to support two standards, if they can avoid it.

It seems like adoption will take a long time, with a lot of arm twisting. Since the current system (and older 'standards') work, how will all of the players in the payments chain be compelled to move to a new standard? I know there is regulation, but its a big investment for all parties involved.

Overall it's nice to see the Fed is so focused on payments. On the B2B side payments are still in the Dark Ages, and we lag behind other countries as well on the consumer side. Hopefully they prove you right Lawrence and find effective ways to push an innovation agenda on both of those sides.

A standard by itself will not spur adoption. The Federal Reserve has developed a new payments vision. The use of the new ISO 20022 standard is one piece of their vision. Unfortunately, older standards such as BAI2 are well entrenched. With little extra funding, trading partners are not going to change standards, especially when they work well. The FED's new vision, which incorporates a number of other features, such as a payments directory, etc., will provide the impetus for change to a new standard.

A standard by itself will not spur adoption. The Federal Reserve has developed a new payments vision. The use of the new ISO 20022 standard is one piece of their vision. Unfortunately, older standards such as BAI2 are well entrenched. With little extra funding, trading partners are not going to change standards, especially when they work well. The FED's new vision, which incorporates a number of other features, such as a payments directory, etc., will provide the impetus for change to a new standard.

Another example of how corporate banking and payments is starting to catch up to some of the trends that have been rocking the retail consumer side for a while now. Hopefully the new standard will accelerate that trend on the B2B side.

Is there a timetable or any compliance deadlines for ISO 20022? If this is something that only works if widely (universally?) adopted, then I would think that the parties behind it would want to a) create a sense of urgency with an aggressive, but manageable, deadline, and b) create some incentives for banks and their partners beyond "this is a better way to do it." Thanks for the update on this initiative, Lawrence.